Words you may need to know (see Glossary):

• Placed in service
• Standard mileage rate
• Unit-of-production method

You cannot use MACRS to depreciate the following property.

• Intangible property.
• Any motion picture film or video tape.
• Any sound recording.
• Certain real and personal property placed in service before 1987.

You can choose to exclude from MACRS any property you can properly depreciate under a method of depreciation not based on a term of years, such as the unit-of-production method. For more information, see Election To Exclude Property From MACRS, later.

Property Placed in Service Before 1987

There are special rules that may prevent you from using MACRS for property placed in service by anyone (for any purpose) before 1987 (before August 1, 1986, if MACRS was elected). These rules apply to both personal and real property. However, the rules for personal property are more restrictive.

Do not treat real or personal property as owned before you placed it in service. If you owned property in 1986 but did not place it in service until 1987, you do not treat it as owned in 1986.

Example. Sandra Coffee bought and took delivery of an item of personal property in November 1986. The property was not installed and operational until February 1987. Although she actually owned the property in 1986, it was not placed in service until 1987. For purposes of these rules, she does not consider the property as owned by her until 1987.

Personal property. You cannot use MACRS for most personal property (section 1245 property) you acquired after 1986 (after July 31, 1986, if MACRS was elected) if any of the following apply.

1. You or someone related to you owned or used the property in 1986.
2. You acquired the property from a person who owned it in 1986 and as part of the transaction the user of the property did not change.
3. You leased the property to a person (or someone related to this person) who owned or used the property in 1986.
4. You acquired the property in a transaction in which:
   1. The user of the property did not change, and
   2. The property was not MACRS property in the hands of the person from whom you acquired it because of (2) or (3).

Real property. You cannot use MACRS for certain real property. This includes real property acquired after 1986 (after July 31, 1986, if MACRS was elected) if any of the following apply.

• You or someone related to you owned the property in 1986.
• You lease the property back to the person (or someone related to this person) who owned the property in 1986.
• You acquired the property in a transaction in which some of your gain or loss was not recognized. MACRS applies only to that part of your basis in the acquired property that represents cash paid or unlike property given up. It does not apply to the substituted portion of the basis.

Exceptions. These special rules do not apply to the following.

1. Residential rental property or nonresidential real property.
2. Any property, if in the first tax year it is placed in service, the deduction under the Accelerated Cost Recovery System (ACRS) is more than the deduction under MACRS using the half-year convention.
3. Property placed in service after 1980 and before 1987 if it was transferred to you from a related person or converted from personal to business use after 1986 and the deduction under ACRS is more than the deduction under MACRS.

For information on how to figure ACRS, see Publication 534.

Example. On March 3, 2000, you bought a machine from your father, who had bought and placed it in service on November 1, 1986. You used it only for business in 2000. Because your father owned and used the machinery in 1986 it does not qualify for MACRS unless the deduction under ACRS is greater than the deduction under MACRS. The machine's depreciable basis is $1,000. Under ACRS, the machine is 5-year property with a first year percentage rate of 15%. Your deduction under ACRS would be $150 (15% x $1,000). Under MACRS, assume that the machine is 7-year property. The percentage rate for 7-year property using the half-year convention is 14.29% (rate from Table A-1 in Appendix A). The deduction under MACRS would be $142.90 (14.29% x $1,000). Because the depreciation for the machinery under MACRS is less than that under ACRS, you must use MACRS.

For property placed in service before 1981 that was transferred to you from a related person or converted from personal to business use after 1986, use the straight line or declining balance method as discussed in chapter 2 of Publication 534.

Related Persons

You must determine whether you are related to another person at the time you acquire the property.

A partnership acquiring property from a terminating partnership must determine whether it is related to the terminating partnership immediately before the event causing the termination. For this rule, a terminating partnership is one that sells or exchanges, within 12 months, 50% or more of its total interest in partnership capital or profits.

To determine whether you are related to the person you acquire the property from, the following are related persons.

1. An individual and a member of his or her immediate family, including a spouse, child, parent, brother, sister, half-brother, half-sister, or any ancestor or lineal descendant.
2. A corporation and an individual who owns directly or indirectly more than 10% of the value of the outstanding stock of that corporation.
3. Two corporations that are members of the same controlled group.
4. A fiduciary of a trust and a corporation if more than 10% of the value of the outstanding stock is owned directly or indirectly by or for the trust or grantor of the trust.
5. The grantor and fiduciary of any trust, and the fiduciary and beneficiary of any trust.
6. The fiduciaries of two different trusts, and the fiduciaries and beneficiaries of two different trusts, if the same person is the grantor of both trusts.
7. Certain educational and charitable organizations and any person (if an individual, including the members of the individual's family) who directly or indirectly controls the organization.
8. A partnership and a person who owns directly or indirectly an interest of more than 10% of the capital or profits of the partnership.
9. Two partnerships, if the same persons directly or indirectly own more than 10% of the capital or profits of each.
10. The related person and a person who is engaged in trades or businesses under common control (see section 52(a) and (b) of the Internal Revenue Code).
11. Two S corporations if the same persons own more than 10% in value of the outstanding stock of each corporation.
12. Two corporations, one of which is an S corporation, if the same persons own more than 10% in value of the outstanding stock of each corporation.
13. A corporation and a partnership if the same persons own both of the following.
    1. More than 10% in value of the outstanding stock of the corporation.
    2. More than 10% of the capital interest or profits interest in the partnership.

Ownership of stock or partnership interest. To determine whether an individual constructively owns (is considered to own) any of the outstanding stock of a corporation or an interest in a partnership, apply the following rules.

1. Stock or a partnership interest owned by or for a corporation, partnership, estate, or trust is constructively owned proportionately by or for its shareholders, partners, or beneficiaries. However, for a partnership interest owned by or for a C corporation, this applies only to shareholders who own, directly or indirectly, 5% or more in value of the stock of the corporation.
2. An individual constructively owns the stock or partnership interest owned by or for the individual's family.
3. An individual who owns, except by applying rule (2), any stock in a corporation constructively owns the stock owned by or for the individual's partner.

For purposes of rules (1), (2), or (3), treat stock or a partnership interest constructively owned by a person under rule (1) as actually owned by that person. Do not treat stock or a partnership interest constructively owned by an individual under rule (2) or (3) as owned by that individual for reapplying either rule (2) or (3) to make another person the constructive owner of the same stock or partnership interest.

Certain Nontaxable Transfers of Property

MACRS does not apply to property involved in certain nontaxable transfers. This applies to property used before 1987 and transferred after 1986 to a corporation or partnership if its basis is determined by reference to the basis in the hands of the transferor or distributor. If MACRS was elected, it also applies to property used before August 1, 1986, and transferred after July 31, 1986, to a corporation or partnership if its basis is determined by reference to the basis in the hands of the transferor or distributor.

The nontaxable transfers covered by this rule include the following.

• A distribution in complete liquidation of a subsidiary.
• A transfer to a corporation controlled by the transferor.
• An exchange of property solely for corporate stock or securities in a reorganization.
• A contribution of property to a partnership in exchange for a partnership interest.
• A partnership distribution of property to a partner.

When figuring depreciation, treat the transferee as the transferor to the extent of the amount of the transferor's adjusted basis. The transferee is the person receiving the property and the transferor is the person giving up the property. The transferee cannot use MACRS for the adjusted basis carried over from the transferor. However, MACRS applies to that part of the new basis not represented by the carried-over adjusted basis.

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